In Iowa while campaigning in 2007, then-Senator Barack Obama refused to comment when asked about the Federal Reserve, citing the institution’s independence.
President Obama may be wishing he’d heeded that advice.
Since the president in an interview with Charlie Rose in June indicated he wouldn’t reappoint Federal Reserve Chairman Ben S. Bernanke, intrigue over his successor has grown to a level where Fed experts and former administration officials are concerned that the selection process is so political it could have long-lasting ramifications for the markets, the eventual nominee’s confirmation hearings and the Fed as an institution.
“What’s really unfortunate is how public and polarized this debate has gotten,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s biggest mutual fund, said in an interview on Bloomberg Television. “This has an impact for the market going forward.”
The president and White House officials have spent the past week trying to defuse an escalating public contest between Lawrence Summers, Obama’s former top economic adviser, and Janet Yellen, the Fed’s current vice chairman.
Confronted by a chorus of concerns about Summers -- and letters from House and Senate Democrats voicing support for Yellen -- Obama on Capitol Hill told his party’s lawmakers on July 31 that he has interviewed “lots” of candidates. He threw a new name into the mix, former Fed Vice Chairman Donald Kohn, as he and his aides tried to buy some time, saying the choice was weeks away and not until autumn.
Instead of leaving it at that, Obama also contributed to the Summers-versus-Yellen parlor game.
When pressed by a lawmaker to defend Summers, Obama took the opportunity to praise the former director of his National Economic Council, who was by his side at the height of the financial crisis, in front of skeptics.
In a July 24 interview with the New York Times, Obama said he wants a chairman who understands the Fed’s dual mandate to promote maximum employment and price stability, which some Fed watchers interpreted as an endorsement of Summers, according to one former adviser.
While Washington has come to expect confirmation drama around Cabinet picks and Supreme Court nominees, the publicity and vitriol around the Fed choice has surprised current and former officials.
While Bernanke, during the financial crisis, won confirmation a second time by the narrowest margin ever for a Fed chairman, the transitions to new chairmen usually have been smooth, said former Richmond Fed President J. Alfred Broaddus, citing Paul Volcker, Alan Greenspan and Bernanke.
“I can’t remember anything like this in terms of nominations,” said Broaddus, who started working at the Fed in 1970 as an economist. “It’s one of the more politically intense episodes in my experience at the Fed that I can remember.”
According to former economic officials, the White House underestimated how closely financial markets -- both domestic and international -- would be watching a public argument over this appointment and they’ve been puzzled as to why Obama has continued to comment.
If the intrigue intensifies, it could hurt both Summers’s and Yellen’s chances of being nominated by setting up an intense confirmation fight. The controversy may bolster Republicans’ case for turning Summers’s confirmation hearings into a review of the president’s economic policies. And, if Summers were confirmed, it would make it harder for him to immediately have the status and respect that a chairman deserves, according to a former Fed official.
Among Democrats, Summers’ support of deregulation during the Clinton administration is an issue along with remarks he made while president of Harvard, suggesting women might be inherently less capable than men in the sciences. That could broaden into a discussion of gender issues and the insularity of a male-dominated White House, which have prevented a substantive discussion about monetary policy.
At the same time, Evercore Partners Inc. Chairman Roger Altman, a former U.S. Treasury deputy secretary, said in an interview on CNBC yesterday that Summers is the most battle-hardened choice to lead the Fed in a challenging era.
Yellen, as president of the San Francisco Fed, was one of the only members of the Federal Open Market Committee to warn about the fallout from a collapse in housing. At a 2007 Fed meeting, she called housing the “600-pound gorilla in the room.” Yet adversaries say her record suggests the committee under her guidance wouldn’t be strong enough on containing inflation.
While Yellen would be the first woman to lead the Fed and has strong backers outside the administration, Summers’s allies in the West Wing include Jason Furman, chairman of the Council of Economic Advisers, Gene Sperling, director of the National Economic Council, U.S. Trade Representative Mike Froman and Brian Deese, deputy director of the Office of Management and Budget, according to officials.
Obama is also consulting with his former Treasury Secretary, Timothy F. Geithner on whom to nominate. While Geithner might have been Obama’s first pick for Fed chairman, he’s told current and former administration officials that neither he nor his wife, Carol, will consider returning to Washington service. Geithner has insisted on serving only as a counselor for who should get the job, instead of becoming a candidate for it, according to people familiar with the matter.
Obama and Geithner developed a personal friendship and close working relationship, forged first during the initial financial crisis and then as the Obama administration worked to prevent the collapse of the euro.
While Geithner has a long history with Summers, it doesn’t give his former colleague an edge in the selection process, according to the people.
Obama told the senators this week that, “when it comes down to their basic philosophy on the future of the Fed,” the differences between the candidates were so small “you couldn’t slide a paper between them,” Senator Dick Durbin of Illinois, the chamber’s No. 2 Democrat, said after meeting with Obama.
Fed officials are debating whether to start scaling back a measure used to try to spur the U.S. economy -- the last of three bond-buying programs aimed at lowering long-term interest rates. The nation’s unemployment rate of 7.4 percent last month, while down from a 26-year high of 10 percent reached in October 2009, is still higher than the 6 percent average level of the past two decades.
The public debate over competing candidates “has detracted a bit from talking about the things that really matter in a chairman,” said Broaddus.
El-Erian said the discussion is starting so early that “it forces people not just to focus on what’s good, but it also forces people to find differences and that is not a good thing. What you really want is continuity of monetary policy to make sure that you continue to allow the economy to heal.”
As White House officials have tried to tamp down speculation, they’ve signaled that Obama won’t be announcing the decision during his August vacation on Martha’s Vineyard, as he did with Bernanke’s reappointment in 2009.
Pressure campaigns from Congress or allies of Summers and Yellen, they’ve said, aren’t useful.
Obama “puts a lot more stock in private advice than public advice,” senior adviser Dan Pfeiffer told reporters July 31 at a Washington breakfast sponsored by the Christian Science Monitor. “He’ll weigh all that advice and then he’ll make a decision who he thinks is the best person for the job.”
For now, some Democrats who have publicly questioned whether Summers should lead the Fed aren’t escalating efforts.
Senator Sherrod Brown, an Ohio Democrat, wrote the letter signed by 19 Democratic senators and one independent July 26 praising Yellen and urging the president to nominate her as Fed chairman. Brown said he doesn’t plan to take it further.
After Obama’s July 31 meeting with Senate Democrats, Durbin told reporters that he would still have “a number of questions” if Summers were nominated: “I’m not saying I’ll vote against him, but I’ll certainly ask a few questions.”